Tag: Times of India

Despite being a tool for fighting corruption, demonetization has polarized us as a society. How do we, as a society, think on a matter of vital national interest? Please see the opinion of the common man at the end of this blog. What should be done to make this a national initiative? Please read http://wp.me/p7XEWW-km

Background

The current demonetization drive for stopping corruption has either become a boon or a bane. Demonetization of currency has strongly opinionated Indian. At the core of our values, we all want corruption to be eradicated. We all differ in our perspective towards how this should be executed. Eradicating corruption is a fundamental initiative that has significant impact to our identity, polity and to the country’s Macroeconomy. Across sections of the society, many are doubtful and cynical. What makes us feel so? Why do we see a class divide and a strong polarization of opinion? What can be done to reduce this gap and drive this initiative as a national cause?

Is this stop gap? Or will it really stop?

Nefarious means are unlikely to change unless we see a substantial change in attitude towards way of living and transacting in our daily life. Whenever radical change is initiated, and if it is unaccompanied by fundamental change, the system is bound to go back to status quo. I already see those signs. So demonetisation will either stall or impede the flow of black money, temporarily but it won’t nix this at the bud.

Who likes or dislikes demonetization?

Service class and Expatriates for sure are supportive of this initiative. Their earnings are all white transactions. Business, Politician, Illegal (drugs, alcohol, nefarious political-business connections and terrorist), those using hawala, are unlikely to accept or adopt this change. Farming community will be neutral. Poor will be swayed by the noise rather than the voices they hear.

What an irony, we haven’t learnt for centuries

Earlier, the Englishman arrived in sixteenth century. They stayed, understood, conquered, consolidated, ruled and looted and deprived this golden land not just materially but made us defunct morally.

We still haven’t changed. We still think our cause above the country, prefer to be blind sighted to others perspective. Seems like, that is within our genome and our destiny or else, why can’t we listen to each other’s perspective, why should we not have a national inclusive dialog?

No, that inclusive dialog won’t happen because somewhere, we deeply trust that ‘My truth is superior than your truth’ and we go a step further, to engross all the credit for this achievement. Collectively, we have forgotten what is best for this country.

We know corruption is a national menace, it’s like an enemy within. In the best interest of the nation, we should be unified for this national cause, we should come forward and adopt and accept, and provide constructive recommendations, rise above ourselves to let this happen. To some, this may sound hollow, but nations like Japan and several from European Union, have risen because, their constituent decided to adopt that pathway. It is not a utopian principle, it’s realty with pragmatism.

Should Prime Minister Modi be inclusive?

Yes, if this needs to succeed! Do we need to do more than withdrawing old currency and circulating new notes? Do we need this to be backed up with change in our attitude and fundamental way we think and work in our daily life?

Kamarck, a Sr. Fellow at Brookings Institute Governance Studies, argues that presidents spend too little time investing on Governing. She explains the difficulties of governing in our modern political landscape, and offers examples and recommendations of how our next president can not only recreate faith in leadership but also run a competent, successful administration.’ I believe, we can easily extrapolate this to include our administrators as well.

A Kind request

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Demonetization and India’s Macroeconomy – Will Rupee Depreciate?
After the recent demonetization in India, an event with significant and deep reverberations across its economy, the Indian economy will eventually bounce back in three phase in 1 – 3 quarters, unless accompanied by additional steps to curb the parallel economy under current economic and political environment. Next 1 -3 quarters will report at least a drop by 0.5 to 1.25 percent point in India’s GDP. Despite the economy contracting, this will be similar to deflation. Economic indicators during these phases will differ. Earliest ever blog on India’s Demonetization and its macroeconomic impact. Demonetization and India’s Macroeconomy – Will Rupee Depreciate?

Demonetization – How will it affect the Indian Macroeconomy?

Obviously, the cash financing the legal, semi legal and illegal activities has vanished. Parallel channels, pumping money on the side have suddenly gone dry. Diminution of revenue will have a domino effect in the short term. Diminution of revenue will have a domino effect in the short term. While sparing essential living activities, this will have effects on every aspect of the economy – building, sales, travel, spending etc.

This decrease will eventually, reflect on the overall economy and its growth projections. A significant proportion of free floating cash financing several essential and non-essential daily operations will be strangulated. Cash earned irrespective of means, is an asset and not having an asset or liquidity will have deep impacts. Bloomberg feels it is contraction. To me, its deflation will follow and contraction. Primarily, contraction will be due large volumes of money being sucked out of the parallel (Juggad) economy with accompanying system wide impact. It will change the barometers of all key indices, Irrespective of sectors.

These phases will last 3-4 quarters, unless complemented by addition steps to curb the parallel economy. Next 3-4 quarters will report at least a drop by 0.5 to 1.25 percent point in GDP, at best, definitely risking it from calling it recession. Does that mean inflation and recession? No, despite the economy contracting, this is not recession though it is more similar to deflation. Economic indicators on each of these phases will reflect a different figure.

Now, does that mean I am against Demonetization? Certainly not! No pregnancy is without pain and no delivery is without cry and smile, except when you induce with Cesarean section under anesthesia. However, we are talking about the birth of a new era, and we are trying to understand how this newborn will impact existing earnings and revenue potential of the country in general (the macroeconomic considerations or implications). I see deflation (not recession) with overall contraction in the economy in the immediate future. Mauro Guillen, Director of the School’s Lauder Institute and a Professor at Wharton commented, “In the short term, the move could stifle some businesses that are legal and clean, if they use cash payments. But everyone will adjust. And while it can hurt some small businesses and individuals, it is better to do it than not.”

Three phases of recovery –

Economy will be impacted on several counts from GDP, Per Capita earning, Consumption, Investment, Industrial Production, Fiscal Balance, Public Debt and Unemployment Rates. However, this recovery will be marked by three distinct phases. Each phase demarcated by particular barometer of the economy.

Phase One – Lasting until end December, when the last notes would be officially accepted.

Phase Two – Deflationary pressure contracts the economy

Phase Three – Drop in Interest rates drop to bump up economy

Phase One – The Cash Crunch Phase:

Also the immediate phase succeeding demonetization, marked by severe depletion of cash or cash crunch. Only essential purchase activities will continue. CPI and CFPI will drop during this phase. The manner in which the denominations were retracted created a perceived rather than real loss. Cash spending reduced significantly so also purchase activities. Of course, loss of purchase activities, specifically based on Cash economy, would definitely result in a drop in GDP. Consumer spending activity fell to a near halt. Consumers are refraining from making any purchases except essential items from the consumer staples, healthcare, and energy segments. However, deflation will not be seen until phase 2.

Phase Two – Deflationary Phase:

Though Bank remittances will be high, the system will still be deprived of cash flow. The system has a tendency to bounce back and people will find ways to mobilize cash to support their cash based, if not illegal transactions. This phase will be marked by liquidity mobilization will see a fall in prices on big ticket items such as real estate, less spending on luxury items etc. Apart from Real Estate, Gold and jewelry will also see diminution in value by approximately 10-15%.The next phase will have a little rebound to the GDP along with CPI but big ticket purchase will still be low.

During this period, real estate is likely to show significant down trend. Home prices may drop significantly, especially where investors have high stakes without support. Tier 1 cities will be most affected, primarily due to real estate activities being funded by investors. Tier 2 and Tier 3 will follow suite. Some reports say, accounts activity in the real estate sector, which includes a lot of cash and undocumented transactions, has already slowed down significantly, Metropolitan and Tier 1 cities reported up to a 30% fall in house prices. Industrial production will slow down on account of decrease appetite for domestic consumption. Rupee will continue depreciation against Green bag and the downward slide will be supported by Central intervention. However, decrease fiscal deficit and public debt will help Rupee from falling further. Also, imports will be impacted negatively and that will retain the value of Rupee in midterm.

Phase Three – Drop in Interest Rate:

Continued economic slowdown will mandate stimulation and the interest rates would drop, possibly by 0.5 to 0.75 percent. Trade deficit will decrease marginally. GDP will still not be back to the Nov 30, 2016 value. CPI and WPI will bounce back but not to the Oct 2016 values. Big Ticket items will continue to reel under the deflationary pressure.

End Note:

In the next 2-3 quarters, it will depreciate but eventually, after 3-5 quarters, it will be the most appreciating currency across the globe, primarily for its intrinsic strength but also secondary politicoeconomic phenomenon across the globe. By than, Trumpism will show its negative impact on dollar, Pound would not be as strong as it was Pre-Brexit, Euro should be sliding or at the most stabilized itself from sliding. Yen and Yuan both won’t show much potential for appreciating. Despite their strength, Canadian and Australian dollars won’t have to much impact.

Several factors will weigh in in favor of Rupee. As mentioned earlier, Rupee will depreciate in the next 2-3 quarters but start appreciating by early 2018. Turnaround in Rupee valuation vis a vis major currency baskets (appreciation), and slide of dollar, will most likely coincide at the same time, given the current political economic situation. Rupee should start appreciating and will dominate overall currency baskets after 3-5 quarters.

I always trust, when the enterprise, entity or a country stands on sound morals and ethical values, its long term outlook is strong. We definitely are moving in a direction towards that needed change. However, as noted earlier, I also feel this pregnancy and delivery is not without pain, cry and smile.